Silverlake Axis - RHB Invest 2018-12-14: V-Shaped Recovery Ahead

Silverlake Axis - V-Shaped Recovery Ahead

Maintain BUY, DCF-based Target Price of SGD0.65, 54.8% upside.

Silverlake reported a stellar 1Q19, with revenue and PATMI surging 36% and 70% y-o-y to MYR166.6m and 57.9m due to the implementation of the contracts secured few months ago. The next few quarters should be stronger as it continues to draw down on its MYR320m orderbook, with both licensing and project services revenue projected to grow robustly.

Earnings from the acquisition of Xinfotech will also kick in 2H19.

Stellar 1Q19 but better quarters ahead.

Going forward, management aims to utilise at least MYR200m worth of orders for FY19F, which will likely result in a 64% y-o-y PATMI surge for FY19F. Margins improvement will also likely continue on higher contributions from the lucrative licensing revenues.

MYR320m orderbook, with potential large-sized contract wins ahead.

Despite drawing down SGD55m of its orderbook in 1Q19, the company secured another MYR25-30m worth of contracts on the digital banking front. This brings its orderbook to MYR320m.

With banks increasing their IT budgets, we understand that management is still actively in talks with a few potential new and existing customers, and is confident of securing more large-sized contracts in 1H19 – which should further contribute more to PATMI growth in FY20-21.

Acquisition of XInfotech group.

Silverlake has entered into a agreement to acquire 80% stake in XInfotech group, a provider of software solutions for the issuance and verification of digital identity documents and financial smart cards, for an initial consideration of EUR17.6m. Of this, EUR3m will be paid in the next two financial years – subject to certain growth targets being achieved and an earn-out consideration whether it can undertake an IPO by 31 Dec 2021 and other profit growth targets.

There is also a put-and-call option requiring Silverlake to purchase the remaining 20% stake, subject to various conditions This acquisition is expected to significantly enhance and expand its digital economy offerings, particularly in the areas of public and private enterprise digital identity solutions for customer identity economics, social and financial inclusion, security, and payments applications.

The company will also extend its geographical coverage and business operations internationally, with more than 380 enterprise customers in over 80 countries. Xinfotech booked EUR1.99 NPAT for FY17, which roughly translates to 11x FY17 P/E – which will be earnings-accretive for Silverlake.

V-shaped recovery affirmed; maintain BUY.

With bumper years of PATMI growth ahead justified by its strong orderbook of over MYR320m not seen since FY15-16 and potential large contracts still to come, we believe that Silverlake’s V-shaped recovery is intact.

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